A S.I.M.P.L.E Framework (Qualitative Analysis)

Personal insights in evaluating the quality of a business

Disclaimer: The information contained within this website and article is not financial advice and reflects my opinion in a strictly personal capacity. I am an engineer by training and profession; I do not possess formal qualifications in finance or investment. I may hold positions in stocks mentioned and hence probably biased. This website and article isn’t writtent to give you advise. I am just using as my online journal to share knowledge and insights and to get feedback - I can’t guarantee the complete accuracy of all content so don’t relie on it. Please conduct your own research or consult a prefessinal financial advisor - I am not the one.

Everyone has a unique approach to assessing businesses, whether as an entrepreneur, employee, or investor. Our specific views and biases often lead us to favor certain types of businesses.

Suppose you're job hunting and find yourself with multiple similar offers—same compensation, similar culture, among other parallels. The deciding factor might then be which business seems more poised for success. How do you determine that?

Investors face a similar dilemma. With countless pitches claiming each business is the best, how do you sift through the noise? Which criteria or framework do you use to gauge potential success?

This is where personal frameworks come into play. Often, we don’t consciously think about our criteria until we sit down and explicitly outline them. The goal of this blog is to unpack my thought process, which may inspire you to do the same.

My methodology is an evolving one, but at its current stage, I've distilled it into what I call the S.I.M.P.L.E Framework. Admittedly, I’ve shaped my criteria to fit this acronym in hopes of making it memorable. Each element is interconnected, which will become evident as we delve deeper.

S - Solution

A business must address a real, pressing problem or need in the market. This is about understanding the product-market fit. Ask whether the product or service is addressing an actual demand or if it's a solution looking for a problem.

Is a new product developed simply because it's possible, rather than because there's a clear need for it? Often, these innovations are driven more by advances in technology than by consumer demand. This type of innovation typically flourishes during periods when money is freely available. For example, consider smart fridges that can connect to the internet and display the weather, or smart washing machines that connect to your Wi-Fi and have an app for control—really? Is there a need? Or does the new IoT advancement mean we will connect every device to the internet whether we need to or not?

I - Innovative

A business must innovate, whether through technological advances, unique business models, marketing strategies, or pricing. True innovation delights stakeholders—customers, employees, shareholders, and partners alike. Some businesses get it - you know it when you deal with them.

M - Margin

This is a no-brainer for me—without margin, a business can't make money. A healthy margin also indicates that competition either hasn't caught up or the business has some sort of uniqueness (smart kids call it a "moat") that allows it to sell its products at a price significantly higher than the cost.

P - Product ( or Service — but let’s go with Product to get “P”)

The product or service should have features that set it apart from the competition. This uniqueness can be due to design, brand, quality, or any other attribute that makes it preferable in the eyes of consumers. Some companies do an amazing job coming up with products that have a cult-like following—take Apple or Tesla, for example.

It is very difficult to gauge this for products or services that aren't made for consumers, for example, MRI machines, software that runs plant automation, or any enterprise software solution. For these, you need to rely on experts—you can find good information on various platforms like LinkedIn and Gartner's Magic Quadrant, or similar reports. Product review sites or various forums can also be helpful. And I don’t recommend relying solely on numbers (as that’s looking back—things change so fast that you can’t be sure if competition has arrived or if the culture has deteriorated within—it takes a while for that to be reflected in the numbers).

L - Leadership

Very self-explanatory: a leader's integrity can't be judged by numbers or how they speak, but if you follow the company long enough, you will have enough history to rely on to judge whether management does what they say. I appreciate businesses run by founders who have skin in the game, a long-term focus, and a habit of underpromising and overdelivering.

E - Expanding Market

It helps if you cycle in the direction of the wind. The same principle applies if the market that a business operates in is already large and expanding at a greater rate, as this presents more opportunities and reduces some risks related to market saturation or competition to a certain extent.

For example, even if you have a solution for a real-world problem, but that problem isn’t faced by many people or organizations, how can the business profit with such a limited market?

Also, you don’t want to operate in a shrinking market. For instance, you wouldn’t want a business whose revenue relies on selling MP3 players or CDs when streaming services are on the rise. Eventually, you would be out of business.

Final thought

Once you go through all these questions and ponder over how the business model is, and satisfied with it, then comes looking at the finances. Financials alone only give you backward-looking numbers—they provide information about execution so far, but past performance isn’t a guarantee of future performance. That’s why a clear understanding of the future prospects of the business needs to be pondered over before diving deep into the financials or quantitative analysis ( I will cover main criteria for that analysis in a S.O.L.I.D framework)

Even when you do a Discounted Cash Flow (DCF) analysis, you have to forecast future cash flows and then discount them back. To forecast future cash flows within a reasonable range, you need to form an opinion about the business based on the above points and then forecast based on that.

What are your go-to criteria? Is S.I.M.P.L.E good enough? Am I missing something?

Thank you for reading. If you're in Australia, you're likely looking forward to a four-day weekend (let’s be honest, who’s actually working on Friday when Thursday is a public holiday?). It's an ideal time to reflect on this framework or create your own. (For those reading in the future—just for context, this article was written on Wednesday, April 24th, 2024, the day before ANZAC Day.)